Marketing Analytics – Customer Lifetime Value

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Marketing strategy necessitates the use of metrics to measure and analyze performance so that marketing strategy can be adjusted to maximize that performance.  This week, we’ll be discussing a number of metrics and marketing analytics. Today, Customer Lifetime Value will be discussed and I’ll give step by step instructions on completing a analysis of the value your customers contribute to your firm.

What is Customer Lifetime Value?  According to Wikipedia, Customer Lifetime Value is:

In marketing, customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value (LTV) and a new concept of “customer life cycle management” is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.

Customer Lifetime Value recognizes something most business owners have long realized — that not all customers are created equal and that there impact on your firm’s profitability differently.  Customer Lifetime Value (CLV) analysis is very different than recognizing that some consumers are more influential in driving the consumption behavior of other consumers.  Customer Lifetime Value assesses differences in the buying behavior of individual consumers.

An Example

Higher Consumption

Some consumers buy more of certain products than other consumers (this underpins the concept of a heavy half or 80/ 20 principle).  High consumption may be a function of higher need — such that owners of big dogs buy more dog food than owners of small dogs.  Sometimes higher consumption is a function of a preference for your products such that a high percentage of their purchases are for your product versus your competitors.

I prefer Hilton Hotels, for instance especially Embassy Suites Hotels.  Hence, nearly all my personal and business reservations are made at this hotel chain.  I’m more valuable to the Hilton chain because of this preference, than a customer who only choose their hotel based on convenience or price and only choose Hilton Hotels occasionally when it meets these goals.

Higher Costs

Some consumers cost MORE.  Maybe they use more of the amenities than other consumers.  Maybe they buy frequently in small quantities (which increases costs) or it takes more to sell them.  For instance, one restaurant customer may sit for hours drinking coffee.  This reduces profits — as new sales are not taking place from this table — while creating more costs for the coffee consumed and the staff time necessary to serve them.

Instructions

Collect relevant data.

Customer buying behavior that can be tracked to individual consumers

• Customer Loyalty card data
• Online sales
• Invoices
• Credit card sales
• Hotel registration
• Identify if there are various groups based on their buying behavior
• Others buying data

Cost data that can be tracked to individual customers

• Marketing costs, such as mailing brochures
• Finance costs, such as credit card usage, bad debt collection
• Promotional costs, such as providing rebates, coupons, discounts
• Service costs, such as employee resources for serving customers, answering questions, handling complaints

Retention rate data on how long customers stay with the company.  It may be that there are several classes of customers with different retention rates.  As a manufacturer, you may find small retail outlets only buy from your company for an average of 3 years, while larger retailers might continue buying from your company for 5 years.
Discount rate – which usually equates to interest rates and is an internally determines desired rate to bring figures down to net present value.

Construct Customer Lifetime Value Table

A great example of a completed Customer Lifetime Value table is available here along with instructions of creating the table.  If you have multiple groups you might construct different tables to compare them or set up additional columns within the existing table.

Analyze and Plan

If you look at the table above, there are a number of points that will help you create a marketing strategy that improves your performance.  For instance, you see that the customer doesn’t create a net profit to the business until after year 2.  This emphasizes the importance of practicing customer relationship management to increase customer retention.

Another thing you might find as you analyze this data is that the groups generate different results.  Your marketing strategy should contain strategies to meet the needs of individual consumers.  That marketing strategy might be that some groups get fewer marketing costs allocated toward serving them or scale back the cost of ways you meet the needs of groups to maximize the net present value of that group.  Some groups may no longer justify your company’s efforts to market to them and may be phased out through attrition.

An important concern is to recognize that not all value of a customer CAN be captured through this analysis.  Influence, for instance, is not inherently assessed through this tool, although it can be modified to consider not only individual purchases by groups of consumers but their influence over the buying behavior of others.

A secondary consideration is that some groups of customers may NOT appear to have much value today, but may reflect substantial value in the future — for instance students.